Most people agree that they need to plan their retirement well in advance. Not all act on their financial needs which include retirement planning. But the moment the idea occurs to them of funding their retirement, the first thing they look for is a retirement product. If a product has a label of ‘retirement’ then the search ends and most of the time individuals settle there. This could be the good old Employee’s Provident Fund (EPF), Public Provident Fund (PPF) or even the modern solutions like retirement plans of insurance companies, Retirement Mutual Funds (RMF) or National Pension Scheme (NPS). Let’s look at how these products fare:
Everyone wants top of the chart returns. Return potential of a product is a key parameter. Traditional fixed income focused alternatives such as EPF and PPF offer tax-free returns. They offer 7-8% returns a year. Traditional life insurance policies focusing on retirement offer less than that. ULIP—Unit Linked Insurance Plans (ULIPs) and NPS can offer market linked returns and the actual return depends upon the asset allocation chosen by an investor. RMF with high allocation to equities can offer healthy risk-adjusted returns. Equity mutual funds can offer more than that, but with a dose of extra volatility than that comes with RMF.
Contribution to EPF continues till the time one reaches age of superannuation or till the time of resignation. PPF has tenure of 15 years. Tenure of insurance plans varies between 5 and 25 years, in most cases. NPS contribution can be stopped after reaching the age of 60 years. In case of most RMF and equity mutual funds there is no concept of tenure as they are open-ended schemes, facilitating transactions subject to the rules of schemes.
When an account is opened in PPF and NPS, a subscriber needs to contribute at least the applicable minimum amount per year. Otherwise, an account attracts penalties. To avoid lapse of policies, ULIP buyers need to continue paying premium commitments. Mutual funds, however, are more flexible. In times of cash crunch investors can skip their investments. But this is not the best thing to do. Also, an investor is free to invest more if they have spare cash in mutual funds.
In case of EPF money keeps accumulating till the time of retirement. PPF comes with a 15- year term, though there is a provision for partial withdrawal of money, subject to rules. NPS and PPF allow withdrawal of funds only in specific situations. Most insurance policies score low on interim liquidity. First, they do not allow withdrawal before five years in most cases, and second even after five years, there are poor returns if insurance buyers decide to surrender policy. RMF allows early withdrawal in most cases, but charges steep exit loads. RMF that enjoy tax benefits have a minimum three year lock-in. In the case of equity funds, after one year, there are no exit loads and there is no question of lock-in.
NPS is the cheapest retirement planning solution offering market-linked returns in India. PPF and EPF do not charge separately to subscribers. In case of traditional life insurance products charges are in-built and they are steep, effectively eating into returns. ULIP, however, score better on charges as charges have come down over a period of time. But given the life insurance cover that comes with ULIP, mortality charges are inevitable. In the case of mutual funds charges can be as high as 2 to 2.5% per year. In the case of large schemes, charges can be lower.
Subscription to EPF, PPF, life insurance policies and stipulated RMF are eligible for deduction up to Rs 1.5 lakh per year, under section 80C. In addition to the deduction benefit under section 80C, NPS enjoys an additional separate deduction under section 80CCD for contribution up to Rs 50,000 per year. In the case of EPF, PPF and life insurance maturity proceeds are tax-free. The annuity bought using NPS corpus is subject to tax. However, if the subscriber chooses to withdraw lump sum 60% of the money then the same is tax-free at the time of superannuation. In the case of RMF (with minimum 65% invested in stocks) and equity funds, capital gains are taxed at 10% if they exceed Rs 1 lakh per year. In other RMF where equity allocation is less than 65%, capital gains are taxed at 20% with indexation, if units are held for a minimum of three years.
Contributions to EPF are dictated by EPF rules. One cannot contribute beyond 100% of the basic salary to EPF. The maximum limit of PPF is Rs 1.5 lakh per year. Non-resident Indians cannot invest in PPF. When one buys life insurance policies life cover is kept at minimum 10 times the premium paid, in most cases, to ensure tax efficiency. There are no limits imposed on contributions to NPS, RMF and equity funds. To sum up, mutual funds are better placed if we take a holistic view of all retirement products. Always buy term life insurance to ensure that your spouse’s retirement stays funded even if you are not around and then start saving into a judicious mix of traditional avenues such as EPF, PPF and market linked alternatives like NPS and mutual funds. Start your SIP now and continue it as long as you can to fund your golden years.
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